Government devalues currency

The Zimbabwean government’s decision on Tuesday to devalue the country’s currency by 25 percent has been welcomed by business leaders as a long overdue measure to help salvage a battered economy.

Economist John Robertson told IRIN that the move was significant, although it should have happened long ago: “The announcement has engendered optimism that the economy might turn around, although this will take much more than just the devaluation.”
The Zimbabwe dollar will now trade at 53 to the American dollar, instead of the old rate of 38 to US $1 fixed in January 1999. Long-suffering Zimbabwean companies facing a critical foreign exchange shortage have been buying on the parallel market at 70 to US $1.

“We could not allow a massive free-fall at this stage because of the implications this has on prices on the market and various commitments, especially external commitments for the country as a whole,” new Finance Minister Simba Makoni reportedly said. “On the other hand, we needed to establish a rate that would be sufficiently competitive and attractive for foreign currency reserves that are not currently flowing into the country to be relocated. We believe we have struck a reasonable balance between these two competing forces.”

Robertson said President Robert Mugabe’s government needs to do more than devalue the currency to regain the confidence of international financiers and donors. “The country still has a long way to go before convincing the International Monetary Fund (IMF) to take it seriously.”
He added inflation was one area which had to be addressed: “The government is the cause of inflation through its spending. The government spends 50 percent of the country’s GDP while it collects only 33 percent of GDP in taxes.”

A Zimbabwe Congress of Trade Unions (ZCTU) official told IRIN that in the short term the devaluation will only add to the woes of Zimbabweans already struggling to cope with deteriorating standards of living. “The inflation rate, which is at 70 percent, will rise considerably,” wiping out any benefits from wage increases that workers might receive, he said.